Despite a 100bps rate hike this morning, Russia's Ruble has slipped lower and now trades 55.8 to the USD – a new record low. The initial surge in the Ruble was quickly sold back as the hike, while in line with surveyed expectations, was below FRA-market-implied levels of 200bps. Goldman believes this will not slow the decline and calls for ‘other tools' like unsterlized intervention. Russian default risk continues to rise (though still low) back to the highest since April 2009.

From FX interventions to rate hikes, nothing appears to be slowing the collapse…

But today's rate hike gains very rapidly diminished…

As Goldman explains, this may not be enough…

The CBR raised its main policy rate by 100bp, below market expectations for as much as a 200bp rate hike, but above our forecast for 50bp. In our view, the decision was guided by inflation and inflation expectations dynamics, which have worsened markedly in recent months. The CBR noted that it expects inflation to rise to 10% by year-end and to stay close to this level into Q1-2015, before beginning to decline in Q2 and into H2-2015 – a forecast that is very similar to ours. It indicated that it will maintain a tightening bias in case inflation dynamics worsen further, but will begin easing policy once inflation stabilizes and is on a downward trend. We maintain our view that the CBR will keep rates on hold in Q1-2015, before entering into a rate-cutting cycle in Q2 as inflation begins declining.

In our view, the CBR will continue to adjust policy rates in response to developments in inflation and inflation expectations, while potentially using other tools in order to stabilize the Ruble. These other tools include FX interventions that may be unsterilized and, thus, tighten liquidity, with the CBR limiting the quantities offered at its main lending facilities.

Key numbers

Key rate (7-day auction-based repo): 10.5%, up from 9.5% previously (GS: 10.0%; consensus: 10.5%)